This Week In The Economy: Fed Officials Disagree Over Monetary Policy Outlook, Business Spending Powers Solid GDP Growth, Inflation Rate Spikes

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Fed Keeps Interest Rates on Hold, Officials Split Over Monetary Policy Outlook

The Federal Reserve this week decided to leave its target interest rate unchanged, even as a number of officials dissented against the central bank’s apparent leaning towards an eventual rate cut sometime this year.

Despite the energy price shock from the war with Iran, which is keeping inflation elevated and “contributing to a high level of uncertainty about the economic outlook,” the Federal Open Market Committee reiterated that it remains on guard against risks to both sides of its dual mandate.

The central bank also signaled that is just a pause, not an end, to its interest rate cuts (it last lowered the Federal Funds rate at its December 2025 meeting) — “The Committee would be prepared to adjust the stance of monetary policy as appropriate ….”

This is what sparked 3 of the 4 dissents. Cleveland Federal Reserve Bank President Beth Hammack argued in a statement that “[t]his forward guidance was put into the statement to signal a pause rather than an end to the easing cycle. I see this clear easing bias as no longer appropriate given the outlook.”

Minneapolis Federal Reserve President Neal Kashkari agreed. “Given recent economic and geopolitical developments and the high level of uncertainty about the outlook, I do not believe such forward guidance is appropriate at this time,” he said. “Instead, the FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves.”

**Speaking to members of the press after the meeting, outgoing Federal Reserve Chair Jerome Powell acknowledged that “[the] number of people on the Committee who either could support that language change changing to a more neutral stance so that the hike is as likely as a cut, that number has increased over the intermitting period.”**

He noted, however, that the majority of the voting members of the FOMC did not want to make that change. “[W]e have so much to learn and there’s so much uncertainty about the path ahead, there doesn’t need to be any rush to make that decision now because, you know, what happens in the next 30, 60 days, even by the next meeting, could really change the picture around that — around that language,” he said.

The Senate Banking Committee voted along party lines this week to advance the nomination of Kevin Warsh to succeed Powell when his term as Fed chairman ends mid-May.

Powell said he plans to remain on the Fed Board of Governors “for a period of time, to be determined” and reiterated that he will not leave the investigation into cost overruns in the redevelopment of the Fed’s HQ “is well and truly over, with transparency and finality.”

US Economic Growth In Q1 Powered by Business Investment

The rate of U.S. economic activity for the first quarter of 2026 picked up from Q4, but at a pace that was a little less than expected, as stronger exports and government spending, as well as an acceleration in business investment, was held back by softer consumer spending and a much higher rate of imports.

This combined with a spike in consumer price inflation — above 4 percent for the quarter and with the monthly report showing the March core PCE price index at 3.2 percent compared to a year ago — adds to the increasingly cloudy outlook for monetary policy.

The advance estimate for Q1 GDP shows it increased by 2.0 percent, picking up speed from the 0.5 percent rise in the fourth quarter of 2025 but falling just short of expectations for a 2.1 percent rise.

Consumer spending as measured by Personal Consumption Expenditures rose 1.6 percent in Q1 following a 1.9 percent rise in the fourth quarter, while the demand for imports surged by 21.4 percent after Q4’s 1.0 percent drop. Goods imports jumped 25.8 percent in Q1, following a 2.4 percent drop in Q4.

Exports also rebounded by a significant margin in the first quarter — contributing to the pickup in economic growth. They rose 12.9 percent, erasing the 3.2 percent decline in the fourth quarter. Gross domestic private investment was up 8.7 percent — building on Q4’s 2.3 percent rise. Non-residential fixed investment, a proxy for business capex spending, jumped 10.4 percent in Q1 — speeding up from Q4’s 2.4 percent rate.

Government expenditures bounced back by 4.4 percent, not enough to erase Q4’s 5.6 percent contraction. Non-defense spending surged, up 20.3 percent following a 24.3 percent plunge in Q4.

The PCE price index increased 4.5 percent, up from +2.9 percent in Q4. Core PCE price index increased 4.3 percent, down from +2.7 percent in Q4.

On a monthly basis, the PCE price index for March increased 0.7 percent. Excluding food and energy, the PCE price index increased 0.3 percent.

From the same month one year ago, the PCE price index for March increased 3.5 percent. Excluding food and energy, the PCE price index increased 3.2 percent from one year ago.